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Oil tax bill heard in House and Senate Resources

Phase 2 for Parnell proposal

After advancing out of the Senate Special Committee on Trans-Alaska Pipeline System Throughput last Thursday, Republican Gov. Sean Parnell’s legislation to reform Alaska’s oil production tax regime was heard for the first time Monday in both the Senate Resources Committee and its House counterpart.

Parnell’s bill, numbered in the Senate as Senate Bill 21, would remove progressivity from the tax structure, leaving a base 25 percent rate in place, and rework tax credits offered by the state to oil producers, eliminating some and restructuring others.

“The issue of the TAPS throughput decline is the most urgent one facing the economic future of our state,” Sullivan told the Senate Resources Committee.

Sullivan pointed to examples from around the world, such as the recent case of the North Sea oil region, in which British tax reform worked to stimulate investment into oil production and revive downward trends.

“We’re known as having one of the highest production taxes, particularly at high prices, in the OECD,” said Sullivan, referring to the Organisation for Economic Co-operation and Development, whose membership is often considered to constitute the democratic, capitalist and developed world.

Butcher said that looking at net profits per barrel for companies producing oil in OECD countries, “You see a real outlier in Alaska compared to everybody else.” He said it is second to Norway in the current “price environment.”

Citing consultants to the Alaska State Legislature and the Parnell administration, Butcher indicated in his presentation that Alaska is missing out on a broad upward trend in oil production, with booms in North Dakota, Texas and elsewhere. He said the state’s relatively large share of oil profits, especially when oil prices are high, is a leading cause of that.

“When you combine that with how expensive it is to do business in Alaska on the North Slope, how expensive it is to explore, to develop, to produce, and you combine the high taxes, it makes for a situation that shouldn’t surprise us, which is we’re not seeing what is going on in almost every other oil-producing jurisdiction,” said Butcher.

One of the themes Butcher emphasized during his remarks is the complexity of Alaska’s production tax structure. Parnell has named simplicity among his guiding principles in crafting S.B. 21.

Butcher called progressivity “complicated and unpredictable,” saying the current system frustrates oil companies that have to calculate their tax burden every month when doing business in Alaska.

At a few junctures, Butcher’s presentation met with critiques from the senators on the committee.

One slide in the presentation compared net present value per barrel of oil discounted 12 percent, the “NPV-12%” metric often used in industry analysis, between hypothetical new 50-million-barrel developments in three West Coast oil price scenarios.

A small table showed NPV-12% for the Alaskan development lagging the Lower 48 and the British North Sea developments at $100 per barrel and falling far behind at $120 per barrel, but slightly outperforming the Lower 48 development at $80 per barrel.

“Is there a reason that you changed the slide?” asked Sen. Anna Fairclough, R-Eagle River, one of two senators who sits on the TAPS Throughput Committee as well as the Resources Committee. “You just took out a $70 example. What was that?”

Butcher advisor Michael Pawlowski took the microphone to respond.

“The administration continues with their consultants to run numbers on a regular basis,” said Pawlowski. “The slides are continuously being updated, and we hope to update them throughout the process, as the work continues.”

When Fairclough asked again about the $70 per barrel example, Pawlowski responded, “There’s no specific reason we didn’t put the $70 on there.”

The Senate Resources Committee is the second of three committees to hear S.B. 21. It is scheduled to move on to the Senate Finance Committee once it clears Resources.

Parnell’s proposal, his third attempt at reforming the ACES production tax regime, was the only comprehensive legislation offered on oil tax reform during this legislative session until Monday morning.

Hours before Butcher and Sullivan made their presentation to Resources lawmakers, Democrats in the House and Senate minority caucuses introduced their own “alternative” proposal, which would offer gross revenue exclusions for new oil production as an incentive for companies to produce more oil in Alaska.

Sullivan made what seemed to be an oblique reference to the Democratic proposal and other suggestions for oil tax reform in his remarks.

“The governor’s put forward the bill,” Sullivan said of S.B. 21. “There’s been a lot of ideas already exchanged, and he certainly has mentioned we’re very open to those ideas and discussions, but moving forward on this is really critical.”

Sen. Berta Gardner, D-Anchorage, said during a joint minority press conference after the Democrats’ bills were introduced that she will push for a hearing on Senate Bill 50, the Democratic proposal, in the TAPS Throughput Committee.